Canada to face growthless recovery in 2010: OECD REPORT

OTTAWA — Canada is coming out of recession but headed for little or no growth next year, the Organization for Economic Co-operation and Development says.

OTTAWA — Canada is coming out of recession but headed for little or no growth next year, the Organization for Economic Co-operation and Development says.

The new outlook was seen as mildly good news, even though the OECD’s new numbers are actually gloomier than World Bank projections that sent stock markets tumbling Monday.

Along with Bank of Canada governor Mark Carney’s increasingly cautious statements, the new report adds another brush-stroke to the emerging picture of the near-term future as one characterized by weak or no growth, but no catastrophe.

“Thanks to firm action to stimulate our economies, it appears that we have escaped the worst during this crisis,” said OECD Secretary-General Angel Gurria.

The recovery is likely to be weak and fragile in most industrialized countries, although it will be stronger in emerging economies like China.

The U.S. is projected to grow by 0.9 per cent, half of what the World Bank’s so-called ”gloomy” forecast estimated, while Canada’s advance will be even more timid at 0.7 per cent.

“If there’s such a thing as a growthless recovery, this is it,” said Bank of Nova Scotia economist Derek Holt.

“The OECD is the only one of the three (international forecasters) to offer advice to the Fed (U.S. Federal Reserve) in saying rates should be on hold until 2011. I have considerable sympathy for this perspective”.

The U.S. central bank came close to such a commitment Wednesday afternoon, saying “economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”

One critical brake on ongoing growth, said Holt in an interview, is the low volume of borrowing by businesses and consumers , particularly in the United States, despite low interest rates and improved availability of credit.

The OECD report — while it represents the first time in two years the Paris-based organization representing 30 advanced countries has actually revised its outlook upwards — still remains among the most pessimistic of major forecasters.

The 0.7 per cent growth projection for Canada next year is well below the consents of private sector economists, which see an advance of about two per cent. The Bank of Canada projects growth to rebound to 2.5 per cent in 2010.

“This is an improvement over OECD’s previous forecast, but it is still more pessimistic than everyone else,” said TD Bank economist Richard Kelly.

The TD is projected a 1.4 per cent advance in Canada next year.

The OECD is more in tune with consensus in predicting a 2.6 per cent contraction this year, but most of that is history, occurring in the first six months of 2009.

Several economists have suggested markets may have misinterpreted the World Bank’s estimate that the global economy will tumble 2.9 per cent this year — a low number they attribute to the way the institution averages growth rather than fundamentals.

“All these forecasts are confusing things, but I think the central theme that is emerging is that the recovery will be modest,” said Douglas Porter, deputy chief economist with BMO Capital Markets.

“There is little doubt that the recovery is likely to be subdued by past standards — even with the depth of the current downturn — and the recession could quietly end with a whimper rather than a bang.”

In fact, the OECD does note that while the slump may end later this year, unemployment in Canada will likely keep rising until early next year.

And it had some advice for the federal government — stay prepared.

“Supplementary monetary measures do not appear warranted for now, but the fiscal authorities retain room for further temporary fiscal stimulus should the recovery fail to materialize as expected in the latter part of this year.”

The OECD also warned that the next few months will require close attention from governments to ensure they correctly time when to move from stimulating the economy to worrying about inflation”.

In the short term, it said governments should work diligently to ensure stimulus spending gets done quickly and efficiently.

Then it gets tricky.

“The next few months will be equally testing,” said Gurria.

“There needs to be a clear and credible plan and timeline for phasing out the emergency measures as the recovery takes hold. It is critical to consider these exist strategies now in order to prevent new risks in the years ahead.”